The UK fiduciary duty straitjacket

Should trustees consider environmental concerns, or even more widespread systemic issues, when investing on behalf of their beneficiaries? Despite a nearly 30-year-old ruling that is often cited as evidence that trustees must pursue financial returns above all else, the UK’s Law Commission believes so.

Launching its consultation on fiduciary duties and how these should be interpreted by those who are part of the investment chain, the Law Commission notes that the “narrow” focus on financial returns stems from the Cowan v Scargill High Court case in 1985.

However, ShareAction’s Christine Berry thinks the Commission has now concluded that Scargill should no longer cast its long shadow over investment matters.

“They’ve made a very strong statement that ESG issues can affect returns, and trustees should be considering whether they take those factors into account, which is a major step forward,” says the lobby group’s head of policy and research.

She also believes the Commission’s preliminary findings back the idea of universal ownership – “the idea,” according to Berry, “that trustees can take into account macroeconomic or systemic factors, even if it might conflict with narrower risk/return considerations at the company level”.

Berry thinks that if this understanding had been more widespread ahead of the banking crisis, trustees could have ended up being in a position to challenge financial institutions’ excessive leverage in the interest of the wider economy, even if this could have reduced individual share returns.

She is also convinced the Commission’s mention of international conventions – such as those outlawing cluster munitions, or attempts to reduce carbon output – mean UK trustees should start taking a more active role against weapons manufacturing or climate change.

“What we were always trying to do is clear out of the way this idea that fiduciary duty is a straitjacket or a barrier that stops pension funds from doing things,” she says, adding that, if the Law Commission continues along its current direction of travel, such a goal could be achievable.

The Commission nonetheless falls short of attempting to codify fiduciary duties, saying they are “difficult to define and inherently flexible” at present.

“Any attempt to change fiduciary duties through legislation would result in new uncertainties and could have unintended consequences, especially for trusts,” it adds.

Berry is somewhat concerned by the stance, as she believes lawyers could continue to apply the narrow view fostered in the wake of Scargill if the Commission falls short of issuing a univocal ruling on the meaning of fiduciary duties.

Where Berry sees an opportunity to clear up something that has “bedevilled” the industry for decades by introducing a new legal definition, the National Association of Pension Funds instead points towards existing regulation and says these should be reworded, rather than codified.

Will Pomroy, the NAPF’s corporate governance policy lead, thinks the matters should only be redefined through regulatory guidelines.

“The idea of imposing, via a fiduciary duty, these sort of expectations is probably inappropriate and would actually probably lead to unintended consequences that would be unhelpful for pension funds trying to provide a pension pot for their members,” he says.

Pomroy nonetheless welcomes the clarity in the Scargill case, and says the NAPF never advocated return above all else.

“If the Law Commission’s current review can further clarify [the issue] and add greater transparency and understanding, then that’s beneficial.”